Variable Life
MR. WATSON: All right. Two more policies.
- We talked about whole life,
- Indexed Whole Life
- We talked about interest-sensitive whole life.
- We talked about universal life.
- Indexed Universal Life
Everything we've talked about is regulated by-
ALL: State.
MR. WATSON: This money is invested in the company's general account, bonds & mortgages. Is this invested in the stock market?
ALL: No.
Variable Life
MR. WATSON: For folks who want to take more risk, maybe earning higher returns on their cash values, insurance companies came out with what's called a variable life policy . Variable life. This insurance policy is also known as a securities contract because the cash values are invested in the stock market. Anything that says "variable" is dually regulated, regulated by
- the State, and
- the the Federal Government (Securities and Exchange Commission)
The policy-owner will choose the investments. A prospectus (info on the insurance plan, risk involved, & separate account) must accompany or precede the sales presentation. So, because it is also a securities contract, you need two licenses to sell it.
- The state's (which is what you are now earning) and
- a FINRA (Financial Industry Regulatory Authority license). A Series 6 or Series 7 license. The state and FINRA license. Anything Variable, you need two licenses. When one holds the the securities license they are called a Registered Representative. (be careful, important question).
MR. WATSON: If you ever see the word "variable" this means the policy-owner chooses the investments. Remember this.
MR. WATSON: The main difference between a variable life policy and a regular whole life policy is where those cash values are invested. The risk involved. The policyowner assumes the risk of investing the cash values.
MR. WATSON: With Variable Life, let's say we have $100,000 death benefit. It can never go below this. You put in a fixed premium. But inside this variable life policy, you have different mutual funds.
MR. WATSON: Does everybody know what a mutual fund is? Who does not know, raise your hand? (One hand up) I got a roomful of experts here on mutual funds.
MAN: Basically it's a basket of different stocks.
MR. WATSON: Very good. Guys, I could buy stock in Amazon, one stock today. Make a fortune today? You agree?
ALL: Yes.
MR. WATSON: Or, I could lose everything. You agree?
ALL: Yes.
MR. WATSON: Or I could buy a basket with 30 stocks in it that averages a return; some go up, some go down. But the chance of losing my shirt is slim to none. Do you agree?
ALL: Yes.
MR. WATSON: Or I could buy something called the S&P 500. How many stocks are in that?
ALL: 500.
MR. WATSON: So you have a group of 30 stocks, which is a mutual fund, or you have a bigger mutual fund, which is the average of 500 stocks. Does that make sense?
ALL: Yes.
MR. WATSON: These variable life policies, you have different mutual funds, and you have different degrees of risk. You could have a growth account that's invested in emerging companies or whatever. You could have an aggressive growth account; you could have a bond account; you might even be safe and have a money market account. You choose. Be as safe as you want or as risky as you want. So you could say I want 50 percent going in here, 50 percent in there. You can change your investments in that basket.
MR. WATSON: Let's say they have a trigger amount of 2-1/2 percent, this is called the assumed interest rate (AIR). Just making up a number. If the investments that you have chosen perform better than that 2-1/2 percent, the death benefit goes up, because the cash value is pushing it up. If it doesn't earn that 2-1/2 percent, then it drops back a little less than what it was. It can never go below what you initially purchased. So let's say you had a $100,000 policy. Your account has performed well; now you have $110,000 death benefit. Next year not so well; it's $108,000. But it can't go below that initial hundred thousand.
MR. WATSON: Two guarantees with the variable life policy:
MR. WATSON: Premiums never change, and the death benefit cannot drop below what you initially purchased. You can absolutely shoot for the moon, miss it, and you still live up there among the stars. Y'all understand?
MR. WATSON: If I invest in a regular mutual fund, am I usually taxed on it?
ALL: Yes.
MAN: Not in this situation.
MR. WATSON: You are not taxed on these, because the money is inside a life insurance policy. Do y'all understand?
ALL: Yes.
MR. WATSON: It's a beautiful thing. You need two licenses to sell this. You need the state's license and a securities license, federal license (FINRA). Does that make sense?
ALL: Yes.
WOMAN: Who chooses the investments?
MR. WATSON: The client. So remember, during the sales interview you must give the client a prospectus.